Cut deficit to save economy

Federal Reserve Chairman Ben Bernanke’s warning came not a moment too soon.

Mr. Bernanke last week urged Congress and the White House to figure out how to curb deficits.

The Obama administration’s massive spending plan is putting the U.S. deeper in debt, even as new needs that should be funded keep surfacing.

The nation can handle some deficit spending, but the overwhelming imbalance between revenue and expenditure being created by this administration threatens to undermine the long-term strength and health of the economy.

That indeed was Mr. Bernanke’s message in testimony to Congress.

The irony is that deficit spending is supposed to help “correct” the economy in the short run, but in the long run endangers the very prosperity it is intended to create. Investors both at home and abroad know that the bills generated by deficit spending must come due at some point. And what then?

There are several unpleasant scenarios accompanying this inevitability.

A contraction of the economy is one of them, as Washington is forced to shrink normal spending in order to pay principal and interest on its ballooning debt. Just as increased government spending now theoretically stimulates markets, a sharp decrease in spending in the future would curtail markets — creating an economic slowdown.

Inflation also remains a threat, as government spending stimulus runs the risk of stimulating too much. If consumers with spending on their minds seek out products before the supply side of the economy has time to adjust, the markets register this as a shortage. Prices rise on scarce goods, starting an upward spiral of pricing that devalues the currency — tomorrow’s dollar buys less than yesterday’s.

Investors shy away from such threats; they don’t want to run the risk that they will be repaid in future currency that is worth significantly less than the money they invested.

Yet we need investment in the private sector in order to keep the economy sound and moving ahead.

It’s a delicate balance. Investing money in the economy keeps it percolating along, but pouring in too much may overheat the economy in the short term or create too much debt in the long term.

Private-sector investment is superior to government investment in this regard: It is better attuned to the realities of the economy and less likely to cause maladjustments. (It was misguided government intervention, requiring housing loans to be made to less-than-qualified homebuyers, that helped sink us in this current mess).

As a member of the current administration, Mr. Bernanke does not dispute the White House effort toward government stimulus of the economy. He said that effort was “necessary and appropriate” even if it did worsen the deficit.

But “unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth,” the Fed chairman said.

If Washington doesn’t start showing signs of attention to curbing that deficit, foreign and domestic investors will back away from our economy — precisely when we need their confidence and their money.